My client's factory has been shut for years and the land, building and two generators are let out on one rent. The officer has taxed the whole of it as income from other sources. Can it be house property?
Yes, on this decision. The Tribunal held that where the lease deed shows that the predominant objective is to let out the land and building along with the plant installed in it in order to earn rental income, and there is no visible intention to carry on organised and systematic business activity, the income is assessable under the head income from house property. It relied on the structure of section 14: income is to be assessed under the correct specific head, and only income that cannot be brought under any of the prescribed heads because of its nature falls to the residuary head of income from other sources.
Decided by the ITAT (Shri Ramit Kochar, Accountant Member and Shri Duvvuru R.L. Reddy, Judicial Member) on 2019-11-21, reported as ITA Nos. 2172 and 2263/Chny/2018 (AYs 2006-07 and 2009-10); ITAT Chennai Bench 'B'. It bears on section 22, section 14, section 56, section 24(b) of the Income Tax Act 1961, in House Property and How Tax Law Is Read matters.
This is the answer to the officer who, faced with a composite rent for a building and the plant inside it, reaches for the residuary head because it carries no standard deduction. The Tribunal's route is worth having: the residuary head is a last resort, not a convenient alternative, and a receipt that answers the description of house property income must go there. The reader should also see what the decision does not do. It does not analyse section 56(2)(iii), which brings to tax as other sources the rent of machinery, plant or furniture let along with a building where the two lettings are inseparable and the letting of the building is not otherwise chargeable as business income. The Tribunal did not ask whether the letting of the generators was separable from the letting of the building, which is the question Sultan Brothers directs, and it did not apportion the rent. So the order helps a taxpayer who wants the whole receipt under house property with the 30 per cent deduction, but it is not authority that section 56(2)(iii) can be ignored, and an officer who argues inseparability squarely will not be answered by this order. Note also the direction of travel here: it was the assessee arguing for house property, and the assessee's business had been closed since 2001, which is why no business-income case was available.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee company had earlier carried on the business of fabrication work and the manufacture of bulk handling equipment. That business was admittedly discontinued and stood closed from 2001. By a lease deed dated 1 February 2004 the assessee leased factory land together with the building on it and two generators installed there, at 9 Industrial Area II, Maraimalai Nagar Industrial Complex, Maraimalai Nagar, to M/s Stanadyne Amalgamations (P) Ltd. for six years from 1 February 2004 to 31 January 2010, at a monthly rent of Rs 2,05,000 rising by 25 per cent from 1 February 2007. A copy of the lease deed was filed before the Tribunal. For assessment year 2009-10 the assessee had itself voluntarily declared the rental income under the head income from house property. The Assessing Officer assessed the rental receipts under the head income from other sources; the assessee contended that they were income from house property. Two appeals, for assessment years 2006-07 and 2009-10, were heard together.
The rental income earned from letting out the factory land and building along with the two generators was to be brought to tax under the head income from house property. The predominant objective disclosed by the lease deed was to let out the land, building and generators to earn rental income, with no visible intention to undertake organised and systematic business activity, and the residuary head is reserved for income which cannot, by its nature, be brought to tax under any of the prescribed heads (paragraph 7). The appeals were partly allowed on the several grounds taken.
The Tribunal began from the history of the assessee: the fabrication and manufacturing business stood discontinued from 2001, and the assets were lying idle and had been leased on rent. It then read the lease deed itself, and found that the predominant objective was to lease out the factory land together with the factory building constructed on it and the two generators in order to earn rental income, with no intention visible on the deed to undertake organised and systematic business activity. It noted that the assessee had voluntarily declared the rent under income from house property for assessment year 2009-10. It then set out the scheme of section 14: there are different heads of income, the various incomes earned by taxpayers are to be assessed under the correct head prescribed for bringing that income to tax, and income which cannot be brought to tax under any of the prescribed heads owing to its nature is then brought to tax under the residuary head of income from other sources. Finally it recorded that the Supreme Court in Raj Dadarkar & Associates v. ACIT (Civil Appeal Nos. 6455-6460 of 2017, judgment dated 9 May 2017) had elaborately discussed the circumstances in which rental income falls under house property and when under business, distinguishing its own decisions in Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 and Rayala Corporation Private Limited v. ACIT [2016] 386 ITR 500, and had observed that the facts of each case are to be seen to determine the correct head (paragraph 7).
A perusal of the said lease deed clearly shows that predominant objective of the assessee is to lease out factory land along with factory building constructed thereon along with two generators to earn rental income.
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Handle my notice → Ask a CA on WhatsAppYes, on this decision. The Tribunal held that where the lease deed shows that the predominant objective is to let out the land and building along with the plant installed in it in order to earn rental income, and there is no visible intention to carry on organised and systematic business activity, the income is assessable under the head income from house property. It relied on the structure of section 14: income is to be assessed under the correct specific head, and only income that cannot be brought under any of the prescribed heads because of its nature falls to the residuary head of income from other sources. This was decided by the ITAT (Shri Ramit Kochar, Accountant Member and Shri Duvvuru R.L. Reddy, Judicial Member) and bears on section 22, section 14, section 56, section 24(b) of the Income Tax Act 1961. It is reported as ITA Nos. 2172 and 2263/Chny/2018 (AYs 2006-07 and 2009-10); ITAT Chennai Bench 'B'. This is the answer to the officer who, faced with a composite rent for a building and the plant inside it, reaches for the residuary head because it carries no standard deduction. The Tribunal's route is worth having: the residuary head is a last resort, not a convenient alternative, and a receipt that answers the description of house property income must go there. The reader should also see what the decision does not do. It does not analyse section 56(2)(iii), which brings to tax as other sources the rent of machinery, plant or furniture let along with a building where the two lettings are inseparable and the letting of the building is not otherwise chargeable as business income. The Tribunal did not ask whether the letting of the generators was separable from the letting of the building, which is the question Sultan Brothers directs, and it did not apportion the rent. So the order helps a taxpayer who wants the whole receipt under house property with the 30 per cent deduction, but it is not authority that section 56(2)(iii) can be ignored, and an officer who argues inseparability squarely will not be answered by this order. Note also the direction of travel here: it was the assessee arguing for house property, and the assessee's business had been closed since 2001, which is why no business-income case was available. If it applies to you, the first step is this: Get the lease deed in front of the officer. The Tribunal decided the head of income from what the deed showed about the predominant objective, not from the description in the accounts.
The assessee company had earlier carried on the business of fabrication work and the manufacture of bulk handling equipment. That business was admittedly discontinued and stood closed from 2001. By a lease deed dated 1 February 2004 the assessee leased factory land together with the building on it and two generators installed there, at 9 Industrial Area II, Maraimalai Nagar Industrial Complex, Maraimalai Nagar, to M/s Stanadyne Amalgamations (P) Ltd. for six years from 1 February 2004 to 31 January 2010, at a monthly rent of Rs 2,05,000 rising by 25 per cent from 1 February 2007. A copy of the lease deed was filed before the Tribunal. For assessment year 2009-10 the assessee had itself voluntarily declared the rental income under the head income from house property. The Assessing Officer assessed the rental receipts under the head income from other sources; the assessee contended that they were income from house property. Two appeals, for assessment years 2006-07 and 2009-10, were heard together. The matter was decided on 2019-11-21 by the ITAT (Shri Ramit Kochar, Accountant Member and Shri Duvvuru R.L. Reddy, Judicial Member). On those facts the ITAT held as follows. The rental income earned from letting out the factory land and building along with the two generators was to be brought to tax under the head income from house property. The predominant objective disclosed by the lease deed was to let out the land, building and generators to earn rental income, with no visible intention to undertake organised and systematic business activity, and the residuary head is reserved for income which cannot, by its nature, be brought to tax under any of the prescribed heads (paragraph 7). The appeals were partly allowed on the several grounds taken.
The Tribunal began from the history of the assessee: the fabrication and manufacturing business stood discontinued from 2001, and the assets were lying idle and had been leased on rent. It then read the lease deed itself, and found that the predominant objective was to lease out the factory land together with the factory building constructed on it and the two generators in order to earn rental income, with no intention visible on the deed to undertake organised and systematic business activity. It noted that the assessee had voluntarily declared the rent under income from house property for assessment year 2009-10. It then set out the scheme of section 14: there are different heads of income, the various incomes earned by taxpayers are to be assessed under the correct head prescribed for bringing that income to tax, and income which cannot be brought to tax under any of the prescribed heads owing to its nature is then brought to tax under the residuary head of income from other sources. Finally it recorded that the Supreme Court in Raj Dadarkar & Associates v. ACIT (Civil Appeal Nos. 6455-6460 of 2017, judgment dated 9 May 2017) had elaborately discussed the circumstances in which rental income falls under house property and when under business, distinguishing its own decisions in Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 and Rayala Corporation Private Limited v. ACIT [2016] 386 ITR 500, and had observed that the facts of each case are to be seen to determine the correct head (paragraph 7). In the words reproduced by the source cited on this page: "A perusal of the said lease deed clearly shows that predominant objective of the assessee is to lease out factory land along with factory building constructed thereon along with two generators to earn rental income." The decision followed or applied Raj Dadarkar & Associates v. ACIT, Civil Appeal Nos. 6455-6460 of 2017 (SC) — relied on for the approach to determining the correct head; Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 (SC) — referred to as distinguished in Raj Dadarkar; Rayala Corporation Private Limited v. ACIT [2016] 386 ITR 500 (SC) — referred to as distinguished in Raj Dadarkar.
It was decided by the ITAT on 2019-11-21 and is reported as ITA Nos. 2172 and 2263/Chny/2018 (AYs 2006-07 and 2009-10); ITAT Chennai Bench 'B'. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 22, section 14, section 56, section 24(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The rental income earned from letting out the factory land and building along with the two generators was to be brought to tax under the head income from house property. The predominant objective disclosed by the lease deed was to let out the land, building and generators to earn rental income, with no visible intention to undertake organised and systematic business activity, and the residuary head is reserved for income which cannot, by its nature, be brought to tax under any of the prescribed heads (paragraph 7). The appeals were partly allowed on the several grounds taken. It arises in House Property and How Tax Law Is Read matters, on section 22, section 14, section 56, section 24(b) of the Income Tax Act 1961, and was decided by Shri Ramit Kochar, Accountant Member and Shri Duvvuru R.L. Reddy, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Establish whether the business is live. Where the manufacturing business stands discontinued and the assets are idle and let, the business-income route is largely closed and the argument is house property against other sources. Meet section 56(2)(iii) directly if the officer raises it: show either that the letting of the plant is separable from the letting of the building, or that the letting of the building is itself chargeable as business income. This order does not do that work for you. Watch the consistency of your own returns — the Tribunal noted that the assessee had itself offered the rent under house property for one of the two years. If interest on borrowed capital is claimed under section 24(b), be ready with documentary proof of the nexus between the borrowing and the acquisition or construction of the property; that issue was not decided finally in this order.
Validity check could not be completed. Validity check could not be completed; no search for appeal against this order or for later decisions citing it was carried out. The substantive limit is internal: the Tribunal decided the head of income without addressing section 56(2)(iii), which charges under income from other sources the rent of machinery, plant or furniture let along with a building where the two lettings are inseparable and the letting of the building is not chargeable as business income, and without asking whether the letting of the two generators was separable from the letting of the building. On that question the governing authority remains Sultan Brothers (P) Ltd. v. CIT. The order should therefore be cited for the proposition that the residuary head is a last resort, and not as having decided the inseparability question. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Only paragraph 7, which contains the Tribunal's decision on the head of income, was transcribed verbatim, together with the header block; the remaining grounds in this order concern disallowance of business expenditure after the business was discontinued, a claim for interest, and property tax, and the paragraphs dealing with them (8 to 14) were not transcribed and are not described here. The order lists paragraphs 1 to 14, with paragraphs 12 and 13 dealing with the companion appeal. Both appeals were heard and pronounced on the same day, 21 November 2019. The judgment refers to the Supreme Court decision in Raj Dadarkar & Associates by a commercial citation printed inside the order; that citation string is reproduced from the order and is not an endorsement of any commercial source. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The rental income earned from letting out the factory land and building along with the two generators was to be brought to tax under the head income from house property. The predominant objective disclosed by the lease deed was to let out the land, building and generators to earn rental income, with no visible intention to undertake organised and systematic business activity, and the residuary head is reserved for income which cannot, by its nature, be brought to tax under any of the prescribed heads (paragraph 7). The appeals were partly allowed on the several grounds taken.
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